Designed by Donald Lambert, the Commodity Channel Index first appeared in Commodities magazine in 1980. The Commodity Channel Index is a diverse indicator which can be used to identify new trends or act as a warning against extreme conditions. Donald Lambert originally created the Commodity Channel Index in order to identify new cyclical changes in commodity prices. But others have applied the Commodity Channel Index to instruments diverse as Indices, Stocks and various other securities. The Commodity Channel Index measures the current price level relative to the average price level over a selected period of time. Click on image to enlarge.
The Commodity Channel Index as calculated by Donald Lambert ensures that between 70 and 80 percent of Commodity Channel Index values should fall between -100 and 100+, though during longer time periods a larger number of values will fall outside the -100 and 100+ range. As the Commodity Channel Index measures the difference between an instruments recent price change relative to it’s average price change. A high positive reading indicates that prices are significantly above their average which can be taken as a sign of strength. While a low negative reading indicates that prices are below average and can be taken as a sign of weakness.
As previously mentioned in Donald Lambert’s original calculation 70 and 80 percent of the values should fall between -100 and 100+. The Commodity Channel index can be used as both a coincident or leading indicator. When used as a coincident indicator, a value above 100+ is taken to reflect strong price action which may signal the start of an upturn. While conversely a value below 100- is taken as a sign of weak price action that may signal a downturn. When one is using the Commodity Channel Index one should be careful in order to avoid the many whipsaws that occur with the indicator and I would personally suggest adding another indicator to the mix.